Corporate Insight: A crowded funding market

Historically, a new or growing business would turn to friends, family, the bank, business angels or VCs to fund growth.

12/2/2015 12:00:00 AM

Now, however, more and more businesses are turning to unconventional funding routes, and increasingly the power of the crowd. In this article, Head of Howard Kennedy’s M&A team, Michael Harris, offers his top tips on how to beat the crowd.

Consider the platform. Many different crowd funding platforms now exist, and all operate in different ways. Some platforms, Crowdfunder and Crowdcube for example, allow individuals to make investments in a business in return for equity; others, Kickstarter being perhaps the largest, enable individuals to, in effect, donate money in exchange for a product or service being offered. One of Howard Kennedy’s clients, UK Bond Network, has a particularly innovative model, where loans are secured for companies through a bond auction, thereby ensuring competitive interest rates for investors and corporate borrowers alike.

How much do you wish to raise? Businesses need to be very clear on how much they are looking to raise and the minimum and maximum investments. Asking for a very high minimum sum will limit investor appeal, whereas a low amount may leave a business with an unwieldy number of investors or, as is often the case, with insufficient capital.

The pitch. Very crudely, crowdfunding platforms put your business or idea in front of large numbers of people/investors all competing for investors’ cash. Kickstarter, for example, currently has some 270,000 projects all looking for investment. Your pitch is key to the success, or failure, of securing the desired investment. Successful pitches tell a compelling story.

Marketing and promotion. A well-planned marketing and media campaign should sit alongside your pitch. Appeal to the fan-base the business may already have, as well as looking to engage with new potential investors.

What’s in it for the investor? It may sound obvious, but explain clearly what investors can expect.

For reward investors this may mean an anticipated delivery date for any product, and for equity investors an exit strategy. Also consider using any existing or high profile investors as part of the engagement programme.

Access to equity crowd funding is restricted to ‘certified’ investors –certified by high net worth income or assets. These are self-certification standards that the web site doesn't have to verify. However, the FCA is leaning on platforms to make sure of certain standards for suitability of investments.

Ongoing engagement. All investors will expect ongoing engagement –after all, they will want to know their cash is safe. Keep investors and supporters up to date on progress both in respect to the fund raising and any business activity that might affect that investment.

Be prepared to fail. It is a fact that the large majority of businesses looking for crowd-funded investments will not succeed. Explore why. Was it the product at fault? Or was the pitch weak? Is it worth revisiting, or turning to other and more traditional funding methods? Do not be disheartened if a first attempt fails.

Crowd funding has firmly established itself as one of the key routes for securing investment. That is unlikely to change any time soon, with new and increasingly specialised platforms emerging. As far as investors are concerned, caution should be exercised.

It goes without saying that investment in private companies carries a high degree of risk and whilst crowdfunding sites of course provide information about the businesses there is generally no indication of the level or quality of the due diligence that has been applied. Investors need to apply a degree of skill and experience in making investment decisions. The level of protection for investors is generally lower than that available if investing through more conventional intermediaries and key information, for example how valuations have been arrived at, can be somewhat opaque and a potential bear trap for the unwary.

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